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Hard Decisions Needed to Address the City's PSPRS Liability
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03 January 2017  

The City of Prescott is looking at $81M in unfunded liabilities.

This Thursday, the Prescott Council will hold a study session to discuss payment options for the City’s unfunded liabilities in the Public Safety Personnel Retirement System (PSPRS). 

What: Prescott Council Study Session regarding PSPRS
Where: Council Chambers, 201 S. Cortez Street, Prescott
When: Thursday, January 5
Time: 1 PM

Background

Hiring a police officer or firefighter costs the City of Prescott more than simply their monthly wages. Besides the insurance benefits, there are the retirement costs, a large portion of which the City is responsible for. 

The retirement fund is called the Public Safety Personnel Retirement System (PSPRS). By law, it is managed at a state level, and participation is mandatory for local municipalities and districts. If the funds are not invested wisely, it can be very costly to entities such as the City of Prescott. Even if the fund has a higher rate of return than expected, statutes require that most additional monies be used for increased payouts to retirees, not for re-building the fund. 

Some of these issues were addressed in new laws passed last year by the legislature and Arizona voters. But for those already in the current system, liabilities continue to increase. The City of Prescott is looking at an estimated unfunded liability of $81,000,000.

Although the deaths of the nineteen Granite Mountain Hotshot firefighters added to the urgency of the situation, the problem was already looming over the City. The City of Prescott has the oldest fire department in Arizona. That means there are more retirees receiving benefits than there are active personnel, according to the current PSPRS Actuarial

Quick Facts You Need to Know

1. The City of Prescott is required by Arizona law to participate in the PSPRS - they cannot decide to go off on their own and create their own system.

2. PSPRS as a fund, lost money during downturns in the economy. The City of Prescott had nothing to do with the investment decisions which created the problem.

3. It doesn’t matter. The City of Prescott has a commitment to the Public Safety personnel and has a legal and moral obligation to fulfill that commitment. 

4. Prescott is not the only community struggling with this issue. It is systemic throughout the state.

5. New laws will help the situation going forward with new employees hired after July 1, 2017. It will not make much of a difference for those that are already in the system. 

6. It has to be addressed. There is no other viable option.

7. Currently the needed payments are eating at the General Fund, forcing the City to reduce the services offered to their citizens.

What to Do?

Mayor Harry Oberg's Strategic Plan Committee (SPC) includes Councilwoman Jean Wilcox, Councilwoman Billie Orr and Councilman Steve Sischka. 

"The purpose of the Strategic Plan Committee is to review the four goals outlined in the strategic plan and discuss how the City can accomplish them. The Committee has focused on the first goal of Stabilizing the General Fund with an emphasis on discussing and researching options for paying down the PSPRS debt." 

After several committee meetings discussing every option, the SPC focused on three main approaches to tackle the PSPRS debt (with a couple of variations). The goal is to pay the unfunded liability off in 10 years.

Download the entire presentation here: PSPRS Unfunded Liability Subcommittee Options

1. A new tax on businesses
2. Increasing property taxes
3. Dedicated sales tax

Other ideas considered increasing water/sewer rates and selling the rodeo grounds, but neither were deemed viable. 

After their discussions, the SPC invited members of the community to a lunchtime meeting for their input. 

Option 1: A new tax on local business

The proposed business tax would range from $250-$1000 annually, depending on the impact that particular business makes on Public Safety Personnel. In 10 years, it would potentially raise $35,586,593. That’s not enough to meet the needs, general fund revenues would also have to be used towards liability payments.

Option 2: Property Tax increase

Increasing the property taxes in Prescott would not be easy. At this point, it would not even be allowed under current Arizona law, so it would require legislative changes at the state level. 

Right now, the property tax rates are set at 0.3025%. Increasing that rate (if it were legally possible) to 1.9763% would allow the City to pay off the liability in 10 years. A 7-year and 5-year plan was also presented. 

Option 3: Increase in Sales Tax

Two sales tax increases, 0.60% and a 0.75% were considered, plus a reduction in tax. Both would pay off the liability in 10 years, but the difference would be in how much would be freed up from the General Fund. 

In other words, with a 0.60% sales tax, that would allow over $2M to be used in other areas in City Government. The 0.75% tax increase would free up almost $5M from the general fund each year.

City Manager Michael Lamar suggested that if the sales tax were raised, the City could eliminate property taxes. This would still free up money in the General Fund.

How much would a sales tax add to the everyday citizen in Prescott? Probably less than $175 per year.

If the tax were raised, how would Prescott compare to nearby communities?

First, a look at only the sales tax: 

The overall tax burden difference is even more pronounced between jurisdictions: 

What are your thoughts?

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Watch the discussion with the SPC and community members here: